Pennsylvania Withholding: What you need to know

Pennsylvania employers that are obligated to withhold federal income taxes are also required to deduct state income tax from wages of resident employees and nonresidents who perform services in Pennsylvania.

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Reciprocal state agreements. Pennsylvania has agreements with the following states for withholding each other's income tax when the employee is a resident of the other state: Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia, under which one state will not tax employee compensation subject to withholding of the other state.

Taxes must be withheld on “compensation” paid for services. Compensation includes any remuneration whether paid in cash or another medium, wages, salaries, commissions, certain sick pay, termination pay, and similar types of payments. Pennsylvania's withholding requirements are similar to those under federal law, but with some major differences. Pennsylvania does not automatically recognize changes to the federal Internal Revenue Code. Thus, new federal exemptions from income do not apply unless specifically enacted into state law.

Exclusions. Payments that are not subject to Pennsylvania income tax include: